The best roller coasters have fast turns, steep drops and for the truly hardcore, corkscrews and loops. New Hampshire’s real estate market over the last 30 years has had all of those:
• The interest rate on a 30-year mortgage was 14.4 percent in 1984, and in October 2014 it’s 4.2 percent;
• The median price of a house in NH in 1984 was $100,000.
• In 1984, NH was on the verge of the biggest residential construction boom in the state’s history—adding nearly 20,000 new units annually—about 10 times the recent pace;
• Coming on the heels of strong price appreciation in the early part of the 2000s, foreclosures rose to more than 4,000 a year by decade’s end.
• Massachusetts tech firms like Digital and Apollo Computer were crawling all over southern NH looking for plant locations. New construction was so robust that some postulated the building crane should be our state bird (today it might make the endangered species list);
• Walmart was some far off retailer we’d barely heard of, and now it’s NH’s largest employer with hundreds of thousands of square feet of retail space statewide;
• Thirty years ago you could buy mill space pretty much all across the state for $5 per square foot, or less. Today you can’t even rent it for that, thanks to adaptive reuse ventures in nearly all our older mill cities like Dover, Laconia, Manchester, Nashua and Rochester.
So what lessons can beculled from NH’s real estate roller coaster ride during the past 30 years?
Lesson 1: Real Estate is Cyclical
No, wait….real estate is VERY cyclical. No wait again….real estate is more cyclical than the Bizarro roller coaster at Six Flags New England that is promoted with “Dare to defeat the relentless assault of demented drops on this mega-sized hypercoaster antihero.”
Price drops have been sudden, while recoveries have been painfully slow. This bipolar market resulted in the bank failures of the early 90s and the recent high foreclosure rates. Between 1986 and the middle of 1988, NH home prices jumped 34 percent, only to crash back to that 1986 level by the end of 1991. Now that’s a demented drop! It then took eight years for prices to fully recover.
Our recent performance shows a similar pattern, with prices nearly doubling between 1999 and 2007 and then crashing when the subsequent housing bubble burst—a stomach-churning drop that saw NH’s median sale price fall from about $250,000 in 2007 to under $200,000 in 2011.
Lesson 2: Keep an Eye on Inventories
Rising unsold inventories have been the canary in the proverbial housing coal mine, providing an early warning for subsequent falling sales and prices. According to the NH Housing Finance Authority, inventories began to rise in 2005, nearly three years before prices dropped in 2008.
One key indicator of the health of the real estate market is how long it would take to sell off the current inventory at the sale pace of the last 12 months. When times are good, the inventory is six months or less. When the inventory climbs to about 12 months, head for cover. In the early 1990s inventories approached 36 months. It would have taken about four months to sell off all the properties listed in the state’s MLS system in the early part of the last decade, but when the inventory hit 12 months in 2007, price increases ceased and the housing bubble burst. Right now we’re at a comfortable level of about eight months statewide and less than six months in Rockingham and Hillsborough counties.
Lesson 3: It’s All Interdependent
There is a symbiotic relationship between the state’s broader economy and its real estate markets. A healthy real estate market is dependent on a healthy economy, of course. But the converse is also true. Real estate is a big deal in NH. Assessment data indicates the market value of real estate in NH is about $150 billion, generating about $350 million a year in municipal property taxes.
It’s fair to say that real estate is the single largest source of wealth in the state—as real estate goes, so goes the economy. A quick calculation indicates that the most recent residential downturn drained $20 billion in value from the state’s homeowners, on top of the decline in values of non-residential real estate in the face of rising vacancies and empty storefronts, including some vacant big box retailers. This value decline also halted the expansion of the state’s all-important property tax base, requiring communities to raise tax rates, rather than rely on growth to fuel expanded municipal and school expenditures.
Lesson Four: Patience and Flexibility
In the 1980s, one-third of Manchester’s Amoskeag Millyard was vacant. Today, it is a vibrant, diverse, in-town, mixed use epicenter, whose major problem seems to be providing enough parking for everyone that wants to live and work there. In the early 1990s, the Air Force pulled out of Pease, and some 4,000 jobs evaporated. Today, the Pease International Tradeport supports two or three times that number of jobs on and off the former base. Claremont’s mills floundered for decades after the textile industry shuttered. Today, new investment is finally returning. Just this year, Londonderry has found itself in the midst of a boom of unprecedented proportions with about 1 million square feet of new nonresidential construction underway along with a plethora of new housing.
It’s a story oft-repeated across the state. What do these success stories have in common? First, success comes on the heels of a balanced public-private partnership. For example, the City of Manchester undertook an urban renewal project and adopted more flexible zoning in the Amoskeag Millyard, while the state formed the Pease Development Authority to oversee a balanced development of the 4,250-acre base.
Second, it takes patience. The Millyard didn’t hit its stride for about 20 years. Pease wallowed for a decade or more. In the end, flexibility was key—flexible zoning, flexible marketing, a flexible development community willing to take a chance when others wanted to hold back.
What Lies Ahead?
I’ve been fortunate in foretelling some of real estate’s ups and downs over the years. As I look forward, I see demographics playing a large role in our emerging real estate markets. In fact, the state’s recently completed population projections have worrisome implications in two important respects.
First, the state is not expected to grow fast, experiencing a net growth of about 6,000 residents a year, versus an average of nearly 19,000 annually in the 1980s. A housing needs analysis prepared for the NH Housing Finance Authority by my firm in conjunction with the Center for NH Policy Studies estimates NH will need about 4,000 new units a year to accommodate that growth—well below our historic pace.
Second, all of our projected population growth in the next decade is expected to be over age 65. Young first-time buyers are scarce and financially stressed by high student debt and weak job prospects. Who will buy all our four bedroom colonials built for baby boomers in the 1980s and 1990s, now that those boomers are looking to downsize?
As we look south of the border, into metropolitan Boston, it’s a whole different world, characterized by spiking prices and declining inventories. Traditionally we get the spin-off growth from that phenomenon, but it has yet to impact southern NH.
So what? Buying a home remains a good long-term investment, particularly if it looks like you’ll stick around for a while. But don’t expect to see a return to double-digit rates of appreciation anytime soon. Besides, everyone has to live somewhere. Why not in your own place?
As for non-residential real estate, the state’s slower growth has a direct impact on the demand for non-residential real estate. We simply do not need a sharp rise in new office, industrial and retail real estate unless our economy returns to its boom times, which most economists don’t expect to see anytime soon. Then again, most economists I know have been wrong as often as right. Besides, I’m 68 years old and won’t be around 30 years from now to check up on my observations.
Russ Thibeault is president of Applied Economic Research, a Laconia-based economic and real estate consulting firm he founded in 1976.
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